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Here's Something That You Will Not Find Elsewhere - Proof That Ireland Will Have To Default...

The BoomBustBlog Ireland Haircut Model has been posted, and it is a doozy. For those who anticipate the Euro being a slow train wreck, it may not be so slow after all. Professional and institutional subscribers can access it here as a live, spreadsheet embedded into a BoomBustBlog web page. Users can subscribe or upgrade to gain access. The haircut model is SOOOO damn revealing that I can't keep it all to just site subscribers, thus I have pulled a few bits and pieces out for the general public.

As any who have been following me know, I believe that several European countries are bound to default, ie. restructure their debt. Ireland is in that camp. What makes me so sure about this? Well, its simple math. While I have calculated probable restructuring and haircut scenarios, I am not at liberty to put it out in the public domain just yet, but I can illustrate incontrovertible evidence that shows that Ireland is on an unsustainable path - a path made even more unsustainable by the recent bailout.

Let's take a look at the cumulated funding requirement of Ireland over the next 15 years.

As you can see, the amount Ireland would have to borrow to run the country (even after harsh and punitive austerity measures) is literally more (and substantially more) than the country's projected GDP. These GDP projections are (in part) IMF projections which I have already demonstrated to be grossly over optimistic, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!). As a matter of fact, the tab for Ireland is even greater AFTER the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! This is what happens when you try to save a debt laden country with more debt!

Even after the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout, Ireland is forced to raise an unsustainable and most improbably 110% of its GDP from the debt markets. These debt markets are starting to become highly uncooperative.

Over the next year, Ireland would have had to tap the public markets for between 15 and 20% of its surplus cash flow. Again, unsustainable, and probably not doable in this environment either.

This is why the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout was implemented. Let's not get it twisted though. This is not a solution, nor a cure - it is a method of buying time. It is the European version of what the Americans have been doing for a few years, kicking the can down the road. Alas, the roads are pretty short in Europe, at least in Ireland!

European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.

...

Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts and cut the value of bond holdings.

The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank President Jean-Claude Trichet, who warned it would unsettle bondholders. Merkel, who has faced domestic criticism for aiding EU neighbors, yesterday backed away from the pitch for an automatic penalty, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis.

The new proposal, fast-tracked from a debate set for December, would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.

Trichet yesterday called the compromise a “useful clarification” and the ECB’s Governing Council said in a statement that the Irish program will “contribute to restoring confidence and safeguarding financial stability in the euro area.”

Do you have any reason as to why they are choosing 2013 as a deadline ? Seems like an arbitrary date.

Well, Nick, just follow the money or the lack thereof...

So, what debt raising and servicing that was unsustainable in 2010 was lent even more debt to become even more unsustainable. The chickens come home to roost in 2013, post IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout! What Angela in Germany was alluding to was what all in the know, well... know, and that is that Ireland is already in default and those defaults have been purposely pushed out until 2013. Angela simply (and wisely from a local political perspective, although unwisely from a global geopolitical standpoint) admitted/suggested was that the defaults will be pre-packaged and managed ahead of time. The EU politbureau insists that politics rule the day, and no prepackaged structure be in place for the Irish defaults to be. This means the potential foe even more carnage through the pipelines of uncertainty!

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So, what we have done with the Ireland Sovereign Debt Haircut Model was to compare the unsustainable path that Ireland is on now (yes, with the IMF/EU/Bilateral state leveraged into Ireland loan/Pension fund raiding bailout) with 6 scenarios that have been used by other countries in the past to cut their debt service. These scenarios entail:

Restructuring by Maturity Extension

Restructuring by Maturity Extension & Coupon Reduction

Restructuring by Zero Coupon Roll up

Restructuring by Maturity Extension w/Haircut

Restructuring by Maturity Extension & Coupon Reduction w/Haircut

Restructuring by Zero Coupon Roll up w/Haircut

Click image below to enlarge a screen shot of the model.

For those of you who are currently not subscribers (but are about to hit that button momentarily), let's drill down into what Ireland's prospects are sans a default/restructuring...

This is how we derived the first to colorful eurocharts in the beginning of the post.

I described the Milgram experiments in the post above, and how the leaders of Ireland have taken the place of the "teachers" in said exercise. I quote the post as follows:

The similarities between “Teachers” referenced above and the leaders of the sovereign nations in Europe, as well as the implications of considering the “authority figures” referenced above as being the defacto heads of mulit-national agencies such as the ECB and IMF are literally inescapable to anyone who approaches this with a clear, autonomous and objective mind. In other words, anyone not bound by the straps of “authority”!

This is page 2 of our Subscription only Ireland Public Finances Projections Document, available to all paying subscribers – Ireland public finances projections. If one were to exercise one’s imagination, one could cast the EIU and the IMF as authority figures, and the Irish government as the “teacher”. As you can see, Ireland’s (the teacher’s) view of their prospects are much, much rosier than both the EIU and the IMF’s. So rosy as to be probably unbelievable in many a context, including the current one.

What makes this so bad is that the authority figure’s, the EIU and the IMF’s forecasts throughout this crisis have been so optimistic as to have been downright laughable. I am offering this single page sbove to those who do not subscribe to our services to fully drive the point home that was so graphically illustrated in “Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!” (which is a definite “must read” in and of itself). Of course, our internal team of analysts have come up with numbers nowhere as rosy as the EIU, the IMF, nor Ireland’s. Go figure. Oh year, while you are figuring, you should wonder who has been the most accurate over the last three years – the IMF, EIU, banking analysts or BoomBustBlog. Here’s a cheat sheet. As a hint to exactly why we would be more bearish than the EIU and the IMF (despite the fact they have been consistently wrong to the optimistic side since the beginning of the crisis) is a careful forensic glance at how they (the authority figures), and Ireland (the teacher), calculate Ireland’s debt. It is the farce as follows…

The Farce!

The government has set up an asset management agency – NAMA, which will buy toxic assets from banks at a discount and will in turn issue government-guaranteed securities. NAMA was expected to buy about $81 billion of toxic assets at a price of $43 billion and issue government-guaranteed securities in return. Since these securities have collateral backing and are likely to be repaid through pay back of underlying loans, these securities are considered off-balance-sheet and are not part of general government debt by Eurostat. According to Davy research, while the projected gross government debt excluding the impact of promissory notes and NAMA bonds is 84.8% in 2012, including the impact of promissory notes and NAMA bonds (in other words, including the truth), the gross government debt can rise to 117.4% of GDP. This either competes with or bests Greece, 2010’s poster child of flagrant spending.

This means that the teacher has created a very harsh austerity plan for its “learner”/student/tax paying populace that has materially lowered the standard of living – all based upon numbers that were bogus to begin with. In other words, it ain’t gonna work!

The original austerity plan was based upon pie in the sky numbers planted in pure optimism, and those numbers themselves were based upon an incomplete picture of the countries true debt. This has now come to light as the country faces the prospect of having to again turn to outside entities to assist in the bailing out of their banks. This also wraps up all of the concepts described above in one fell swoop: credibility – none, social proof – lacking, authority – acting in lock step to the ECB/IMF.

I will continue this Irish “mini-series” with a forensic look at the likely haircuts to be taken by holders of Irish debt, a snippet of our Irish public finances model, and then follow it up with a post on the likely contagion and knock-on effects as we have calculated them.

In the meantime, I suggest that paying Subscribers review our Irish analysis and related contagion material:

Next, up we release BoomBustBlog currency models, secrets very few know about the ECB and then we go after Spain with a forensic microscope! We will then wrap up this chapter with a hands on application of the BoomBustBlog Sovereign Contagion model - on that note, some choice graphics from the Banzai institute...

A vector tracing of a viral epidemic and adapted it to what we know about the Euro contagion. Your suggested improvements are welcome...

No haircut on principal amount

Involving haircut on principal amount

No restructuring

Restructuring 1

Restructuring 2

Restructuring 3

Restructuring 4

Restructuring 5

Restructuring 6

Explanation

No extension of maturities and no reduction in coupons

Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same

Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50%

Rolling up all of Ireland's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds

Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are kept the same

Restructuring by doubling the maturity for bonds due from 2010 to 2020 and coupons are reduced by 50%

Rolling up all of Ireland's bonds due to mature between now and 2020 into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to 50% of the average coupon rate of the converted bonds

It is very clear to me that the weaker countries will be forced off the Euro in 2013-2014 timeframe. This gives them time to make the relevant adjustments to bring back their local currencies. Then they can devalue and pay their debtors back based upon a negotiated package (haircut).